When you’ve decided to start your own business, one of the first things to think about is how you’ll structure it. The most obvious way to do this is to operate as a sole proprietor. Because it is simple to set up, the sole trader structure is commonly used by businesses. However, it is critical to consider whether it is appropriate for your current situation as well as your future business goals. In this article we discuss the main benefits and drawbacks of operating as a sole proprietor, as well as alternative business structures you may want to consider.
A sole trader is an individual who owns and operates a business. When you set up as a sole trader, the law considers you and your business to be one and the same. This means that you will completely own and control the business, as well as receive all of its income and profits. However, this also means that you are solely liable for all of the company’s debts and are personally liable for income tax on the money your company earns.
The process of establishing a sole trader business is extremely simple. You simply need to register your company with an Australian business number (ABN). Traders who establish a sole trading business with a TFN trade under their own name. If you expect to make more than $75,000 in a single year, you should also register your sole trader business for GST.
It is important to note that profits earned by a sole proprietorship are treated as personal income. This means that sole proprietors must accurately report business income after expenses and pay income tax using their personal TFN. Sole proprietors must follow the same income tax rules as everyone else.
Sole traders are also eligible for the tax-free threshold if they are Australian residents.
Individuals who run a business in this manner are responsible for organising their own superannuation. If you employ individuals, you must make superannuation contributions for qualifying employees. You may be eligible to claim a tax reduction if you arrange your own superannuation payments.
If you prefer to conduct your business publicly under a trading name rather than your personal name, you must register your selected business name with ASIC. Furthermore, if you desire exclusive use of that business name since it is important to your brand, you should register it as a trade mark with IP Australia.
It is fairly usual for people beginning a small business to set up as a sole trader. This is due to the fact that it is by far the simplest and least expensive business form to establish.
Other benefits of working as a sole trader include:
While operating as a sole trader can be a low-cost way to start a business, there are a number of issues to consider. These businesses face a number of difficulties, including:
The challenges that sole traders encounter are consistent, regardless of the industry in which they work. Many businesses in the home renovation sector (particularly tradies) operate as sole traders, benefiting from this easy and cost-effective business structure. Many aspects of running a firm are often beyond their scope of expertise. When running a business as a sole trader, the owner controls and manages the company. This includes legal duties for all parts of the firm, as well as complete responsibility for debts and losses.
So, how can a sole trader overcome the daily challenges of personal effectiveness while managing all aspects of their business? Having a current functional business plan, accounting and business processes, as well as marketing strategy, is often helpful. The cycle of systems and processes is put to the side as the firm grows and consumers become more demanding of the quality product or service being offered. Making certain changes to the business operations will help to alleviate some of the difficulties.
There are two common alternatives to operating as a sole trader:
Because of the flexibility and minimal administration and start-up costs, operating as a sole trader might be an appealing business structure. However, it is critical to consider the drawbacks, particularly the challenges you may experience, such as: trying to build and grow the company; raising funds; and the risk of personal accountability for the company’s obligations.